Israel's Defence Minister on Wednesday issued building permits for 7,000 new homes in a settlement near Bethlehem in the occupied West Bank, sparking Palestinian condemnation.

Naftali Bennett announced he had "approved the construction of thousands of new housing units" in the Efrat settlement near Bethlehem in the southern West Bank.

The ministry indicated the land would allow the creation of a new neighbourhood called Givat Eitam.

"Construction momentum should not be stopped for a moment," he said.

The rightwing hardliner is expected to leave his post in the coming days.

Prime Minister Benjamin Netanyahu and his former rival Benny Gantz have agreed to form a unity government which will see Netanyahu stay as premier for 18 months, after which Gantz is meant to take over for an equivalent period.

While Netanyahu is in power, centrist Gantz is expected to serve as defence minister, replacing Bennett.

Brian Reeves from the anti-settlement Israeli NGO Peace Now said Bennett's decision meant the building process was "in motion" even if Gantz, who is less supportive of settlement expansion, takes over.

The project, which would further squeeze the already restricted city of Bethlehem, still has to pass through the Israeli housing ministry and could also be challenged in the courts, Reeves added.

Since President Donald Trump came to power in 2017, the US government has ceased to criticise Israeli settlement expansion and has supported proposals to annex parts of the West Bank.

The Palestine Liberation Organization immediately denounced a new "violation of international law."

"This is an outrageous exploitation of the COVID-19 global pandemic to advance the illegal settler project," senior PLO official Hanan Ashrawi said in a statement.

Over the past decade, the population in Jewish settlements in the West Bank has increased 50 percent, according to official data from Israeli authorities.

More than 450,000 Israelis live in West Bank settlements, with around 200,000 in East Jerusalem.

Settlements in both areas are considered illegal under international law.

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